The difference between net income and pretax accounting lies in fiscal debt, which is money a company must send the Internal Revenue Service on a quarterly or annual basis. Understanding the subtleties of income and business tax calls for familiarity with the concepts of revenue, expense and net result.

Pretax Accounting Income

To calculate pretax accounting income, subtract a company's total revenues from total expenses. Revenues come from sales, investment gains and vendor refunds. Expenses may be operating or nonoperating. An example of a nonoperating expense is a loss a business incurs after switching its accounting procedures from American generally accepted accounting principles to international financial reporting standards. Operating expenses range from insurance and depreciation to regulatory fines, workforce compensation, interest and advertising. In a financial dictionary, the term "pretax income" is interchangeable with "taxable income."

Net Income

Under GAAP and IFRS, net income equals taxable income minus taxes due. For example, if an organization has revenue equal to $1 million, expenses of $600,000 and a tax rate of 30 percent, the company's pretax income amounts to $400,000, or $1 million minus $600,000. The corresponding tax debt equals $120,000 -- or $400,000 multiplied by 30 percent -- and this yields net income of $280,000.

Connection

Pretax accounting income and net income interrelate because they're both part of a statement of profit and loss, or P&L. Financial specialists also call this data summary a statement of income or a report on income. Analysis of pretax income and net income show you whether your company is doing fine from a profitability standpoint or whether things aren't picking up as expected. In addition to a P&L, income information flows into retained earnings and a statement of changes in shareholders' equity.

Bottom Line

A company's operational life is filled with plenty of good events as well as failed experiments, setbacks and struggles. By consistently poring over profitability data, an entrepreneur can identify what's going on in operating activities, pinpoint blockbuster products, remove lackluster items and come up with strategies to increase sales and expand market share. The business proprietor also can take cues from profit data to rein in waste, curb expenses in losing segments and right the company's ship over time. A positive bottom line -- or net income -- goes a long way toward attracting investors and easing the concerns of lenders who fret about insolvency.

About the Author

Marquis Codjia is a New York-based freelance writer, investor and banker. He has authored articles since 2000, covering topics such as politics, technology and business. A certified public accountant and certified financial manager, Codjia received a Master of Business Administration from Rutgers University, majoring in investment analysis and financial management.